The Big Picture

June 2010

Trying to understand financial markets by tracking the daily media headlines can be likened to trying to tell the time by tracking the second hand of a watch. If you focus on the finer points, you risk missing the big picture.

A lot of investment-related news is undoubtedly fascinating, particularly to those who live their lives that way, but a lot of it is a distraction for those who want to build long-term wealth through investment. That's because while the news stories keep changing, the basics of sound investment don’t change much at all.

The best approach is to work with markets, not against them; structure portfolios around risks that are related to return, diversify across and within asset classes, pay heed to costs and taxes, remain disciplined and rebalance as your own needs and circumstances change.

Discipline amid the media and market noise is important because although there is a long-term return from risking your capital, the return is not there every year. Returns over shorter time periods are random and unpredictable.

The following chart shows the annual returns for the past 40 years of global share markets, as measured by the MSCI World Index. Some of the best years (1975, 2003 and 2009) came straight after some of the worst years (1973-1974 Oil Crisis, 2000-2002 Tech Crash, 9/11 and 2008 Global Credit Crisis).

 

Getting the timing right around these turning points is the holy grail of investing. The trouble is that no one has been able to show they can perform this feat with any consistency.

Many investors have learnt the hard way the perils of chopping and changing their investment strategies based on short-term movements in the markets and ‘noise’ in the media.

Instead, a better approach is to stay invested. If you remain diversified, have a disciplined and focused long-term approach, you maximise your chances of a successful investment experience.

We know that markets are unpredictable – it’s their nature to go up and down. Our experience and research shows that patient investors are more likely to be rewarded with results aligned to their investment goals.